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The white collar crime blog, for two years (see here and here), has given the collar for the case most needing review to the case of Sholom Rubashkin. The case has an incredible gathering now from a spectrum of individuals and groups across political and ideological views. The Petition for Cert is here and background on the case is here. Here are some of the interesting updates on this case -

Amici Brief for Justice Fellowship & Criminal Law & Sentencing Professors and Lawyers - Download 11-1203 amici brief(a wonderful brief authored by David Deitch and Alain Jeff Ifrah that points out the jurisdiction split among Circuits and why it is important for Appellate "judges to state on the record that they have considered each non-frivolous argument for variance under the factors listed in Section 3553(a)" and how and why each such argument affected the sentence imposed.

Amicus Brief of the Association of Professional Responsibility Lawyers (APRL) - Download APRL Amicus Brief in Rubashkin (a strong brief written by W. William Hodes that provides the importance of this case from the perspective of "an independent national organization of lawyers and legal scholars whose practices and areas of academic inquiry are concentrated in all aspects of the law of lawyering." The brief focuses on the jurisdiction split regarding Rule 33 of the Federal Rules of Criminal procedure. The brief also points out important ethics issues that warrant review in this case.)

The New York Times has the story here. The official announcement may come as early as tomorrow. As always, the devil will be in the details. Here is the $64,000.00 question. What if any limitation of liability for past criminal acts will the banks obtain through this agreement? If there is any limitation on the ability of federal authorities to prosecute the obvious, widespread, and easily provable robosigning fraud that took place in this country, the agreement will constitute a disgrace.

One of the supposed hallmarks of the American criminal justice system is the prudent exercise of prosecutorial discretion. But prosecutorial discretion, even when it works, is a blessing and a curse. A blessing, because it allows for the flexibility and compromise without which most systems, even well-constructed ones, cannot function. A curse, because liberty should not depend upon the the character and wisdom of the person temporarily wielding power.

The U.S. Attorney's Office for the Central District of California has decided not to prosecute Lance Armstrong. An announcement to that effect was made last Friday. The L.A. Times story is here. A good Washington Post piece is here. Today's Wall Street Journal discusses the declination and a potential future probe of of improper leaks related to the case. (An internal investigation of some kind appears to be warranted given the massive leaking that has occurred.) According to the WSJ, the declination decision by U.S. Attorney Andre Birotte and his top aides went against the recommendation of the two line AUSAs handling the case. Maybe, but take it with a grain of salt. News stories about the internal machinations of prosecution teams often get it wrong.

Based on what I know about the case, the decision to decline appears to have been a no-brainer. Recent federal prosecutions involving alleged drug use by star athletes have expended enormous sums of money with mixed or poor results. In the Armstrong matter, the doping, if it occurred, was not itself a federal crime. Prosecutors would have been peddling a wire fraud theory under which Armstrong allegedly defrauded team sponsors by intentionally violating a contractual obligation to avoid improper drug use. Not very sexy. Twelve typical American jurors might well wonder at the start of such a case, "Why are we even here?" Finally, Armstrong is enormously popular and has a sterling defense team with unlimited resources.

The U.S. Anti-Doping Agency (USADA) vows to continue its investigation, accurately noting that its "job is to protect clean sport rather than enforce specific criminal laws." But USADA wants the grand jury materials. This would be a travesty, and is unlikely to happen. Federal grand jury materials are presumptively secret by law for good reason. Don't count on a federal court sanctioning transfer of grand jury materials to an agency like USADA.

In other declination news, the DOJ attorneys prosecuting the Gabon sting case have informed U.S. District Judge Richard Leon that DOJ is considering dropping all future prosecutions. A decision will be made by February 21. The BLT piece is here. Full disclosure: I briefly represented one of the defendants, and considered representing another of the defendants, neither of whom has gone to trial. My comments here are based on the public record. The two cases brought to date have resulted in three acquittals and two hung juries. Nobody going to trial has been convicted in what DOJ thought was a sure win. Whatever merit there was in initially bringing the case, reconsideration is in order. The two trials to date have revealed a number of weaknesses. First, this was a sting--a crime engineered by the U.S. Government. Second, the informant who helped orchestrate it was far more compromised than the typical informant in a white collar case. Third, in a key tape recorded conversation between that informant and one of the defendants, the defendant seeks to back out of the alleged unlawful transaction, but the informant reels the defendant back in by telling him that attorneys have approved the deal. Fourth, the inherent ambiguities and weaknesses in the FCPA itself.

If there has been a benefit to the Gabon FCPA prosecution it is this--it has taught the white collar defense bar that FCPA cases can be fought and won and, presumably, has taught DOJ that FCPA cases aren't as easy to win as they first appear.

In criticizing Judge Jed Rakoff's refusal to rubber-stamp its proposed settlement agreement with Citibank, the SEC has claimed that if it has to require companies to admit wrongdoing as a condition of settlement, there will be far fewer settlements and more trials. As a result, says the SEC, its resources would be so strained so that it would bring considerably fewer enforcement actions. The New York Times on Friday, February 3, cited unnamed "legal experts" as endorsing that view, saying that companies will be less likely to admit facts which could be used against them in shareholder lawsuits. See here.

There is a certain logic to that argument. Companies that have committed misconduct now do choose to pay the SEC rather than admit or reveal their wrongdoing to the public (and to class action lawyers). Companies that believe they have not committed misconduct sometimes decide it is less costly to pay the SEC than fight it. Few SEC cases go to trial. This settlement model works well for the SEC, which gets a check with less sweat, and for most defendants, which conceal their misconduct and/or save money.

But is that in the public good? More trials should lead to more public knowledge, promote more curative government action, and add an additional deterrent to corporate misconduct. Additionally, it should force the SEC to be more scrupulous in bringing marginal or questionable cases since they would more often be required to justify the charges in court.

I also question whether these "experts" are right in their expectation that there would be far more trials. I am not so sure that many corporate executives want public airings of the factual details of the company's wrongdoing. "Experts" predicted that the enactment of the Sentencing Guidelines would overwhelm the federal courts with trials since many more criminal defendants would exercise their right to trial because of the perceived (and actual) harshness and rigidity of the Guidelines upon a conviction. That simply has not happened. The percentage of cases settled by plea has remained relatively constant, if not increased, since the enactment of the Guidelines.

Last week, after President Obama announced a purportedly new initiative, see here and here, to combat fraud, government law enforcement officials, criticized for their lack of activity, promised action in the very near future. It is not clear whether the indictment returned Wednesday in the Southern District of New York for crimes committed four years ago is the action referred to. It certainly is not an earth-shattering case.

On Wednesday, three former Credit Suisse traders were indicted for inflating the worth of collateralized debt obligations (CDOs) to avoid recognition of market losses and thereby increase their bonuses. See here.

The CDOs consisted of pooled, presumably at least in part subprime, mortgages that were sold to investors in packages by presumably reputable institutions with high ratings provided by presumably reputable credit agencies. The presence of large amounts of overvalued CDOs in firm inventories is considered by some a major cause of the financial crisis.

Unlike securities such as listed stocks, there was no liquid market for these mortgage securities and therefore no easily ascertainable market value. Some financial firms were hesitant to mark down these failing obligations because it would considerably decrease reported earnings. Here, it is alleged -- and two of the three indicted have pleaded guilty -- that the traders knowingly concealed the loss in value and secured a bogus evaluation from a friendly small investment bank in order to support the inflated value of the securities. The overvaluation -- or failure to recognize the loss -- resulted in increased compensation for the traders, whose year-end bonuses were based considerably on the profits of their groups.

This case is interesting for several reasons. It is one of the relatively few brought so far that concern alleged criminal wrongdoing after the financial crisis arose. Most previous criminal prosecutions involving failed mortgages have focused on the origination of mortgages and comparatively small-time people such as aggressive mortgage brokers, perjurious buyers and conniving lawyers, and not their securitization.

It is also one of the few instances in which employees of a major financial institution have been prosecuted criminally in a case related to the financial crisis. Nonetheless, it would be a stretch to say that this overvaluation, discovered and corrected by Credit Suisse in days, had a major impact.

This is one of the rare criminal accusations, to my knowledge, involving mismarking or deliberately overvaluing illiquid assets in order to inflate profits. These valuations have a major effect on the profit and loss statements of financial institutions, including hedge funds, and the consequent bonuses or incentive compensation of traders and managers. False marking, often using evaluations by supposed experts or comparable institutions of the worth of securities with no easily-defined market value, is an area which deserves more governmental scrutiny and probably more governmental legal action.

Of course, care must be taken to distinguish deliberate falsity from good faith but erroneous evaluation in this uncertain area.

Virtually every presidential State of the Union speech, or its gubernatorial equivalent, calls for tougher criminal laws and/or new investigative resources. President Obama's address last week was no exception. The President called for the establishment of a new unit "to crack down on large scale fraud and protect people's investments." As blog editor Ellen S. Podgor wondered, see here, it was unclear how this unit would differ from the Financial Fraud Enforcement Task Force established in 2009. I too asked whether this purportedly new unit was anything other than a repackaged version.

The announcement of a new prosecutorial unit also was perhaps an unintended implicit admission that existing federal law enforcement agencies had been less than successful in dealing with serious alleged crimes which some believed had caused the financial crisis. Both Attorney General Eric Holder and SEC Enforcement Director Robert Khuzami defended their record, stating that not every mistake is a violation of law. Holder said, "We also have learned that behavior that is reckless or unethical is not necessarily criminal," a statement which (aside from leading me to ask why it had taken him so long to realize it) should be painted on the walls of every prosecutorial office.

The principal apparent structural difference between this unit, entitled the Unit on Mortgage Origination and Security Abuses ("UMOSA"), and the prior one is, besides its more focused jurisdiction, that this is a joint task force of both federal and state officials. One of its co-chairs -- albeit one of five, four being DOJ or SEC officials -- is New York State Attorney General Eric Schneiderman, who has shown his independence and aggressiveness toward Wall Street by pushing for stronger sanctions against financial institutions for robo-signing and other improprieties committed after the crisis arose.

Generally, joint federal-state task forces are a one-way street. The feds take the best criminal cases and leave the dregs to the state. One purported justification for such selection is that federal laws and rules of evidence make it easier for federal prosecutors to bring cases and win convictions. Schneiderman has indicated somewhat to the contrary -- that New York and other state laws give state attorneys general greater means to bring both civil and criminal prosecutions.

The idea of combining federal and state resources is generally a good one. Too often law enforcement agencies refuse to share information with other agencies, if at all, until they have determined the information was insufficient for them to act on, often too late for use by the other agencies. On the other hand, I fear that some task force constituents might attempt to make an end run around constitutional and statutory laws and rules, specificially Fed.R.Crim.Pro. 6(e), which, generally, as relevant here, prohibits disclosure of grand jury information to non-federal officials. Of particular concern is whether information secured by federal grand juries, much of which is through immunized testimony, will be provided for use by the states. Both Attorneys General Holder and Schneiderman seem aware of this restriction, but both appear to view it as an obstacle to overcome rather than a right to ensure. How scrupulous they will be in upholding the rule and spirit of grand jury secrecy will be seen.

The Third Circuit in United States v. Wright held that the Skilling decision requires an new trial in this case on the honest services fraud convictions and that "prejudicial spillover tainted their traditional fraud convictions." The court stated:

"An honest services fraud prosecution for bribery after Skilling thus requires the factfinder to determine two things. First, it must conclude that the payor provided a benefit to a public official intending that he will thereby take favorable official acts that he would not otherwise take. Second, it must conclude that the official accepted those benefits with the intent to take official acts to benefit the payor."

The court also stated that, "[i]n light of Skilling, the jury should have been instructed on the bribery theory but not the conflict-of-interest theory."

"I don't know if there was a stench that developed in this case, but there was a bad odor at times, and so the issue that I'm inviting both sides to address is...whether either through a finding of due process violations or in the exercise of my supervisory power...something akin to the whole being greater than the sum of its parts justifies throwing out this conviction, because a lot of the parts that led up to this conviction are extremely troublesome." U.S. District Court Judge Howard Matz during 6-27-11 post-trial hearing.

The briefs are in and the hearing is set for this Tuesday at 10:00AM in the Lindsey Manufacturing FCPA prosecution. At issue is the Lindsey-Lee Defendants' Motion to Dismiss the Indictment With Prejudice Due to Repeated and Intentional Government Misconduct. A potential bad sign for the Government, as if it needed another one, is the Court's November 16th Order requiring the U.S. Attorney's Office to file certain Government and Court exhibits in the record by November 18. The Court had already publicly criticized the Government for its use and handling of some or all of these exhibits. The Government filed the exhibits in question on November 17, and they are now available through PACER.

Judge Matz has previously characterized the Government's investigation and prosecution of the case as "extraordinarily sloppy at best." He was apparently so troubled by the Government's actions that he generated and kept a post note during trial in order to keep track of them.

The Second Circuit yesterday reversed and dismissed (without prejudice) the conviction of former New York State Senate Majority Leader Joseph L. Bruno for theft of honest services fraud on his failure to disclose alleged conflicts of interest. The reversal was based on the Supreme Court decision in United States v. Skilling, which limited 18 U.S.C. 1346, the honest services statute, to cases involving bribery and kickbacks. Even though some circuit courts have upheld honest services fraud convictions over Skilling challenges, the reversal here was no surprise since, among other things, the government conceded error.

In an earlier blog (see here), we discussed what might have been the most important issue in the case: whether the Court should for double jeopardy purposes analyze the sufficiency of the government's evidence at trial based on the "new" standard set forth in Skilling or the "old" standard existing at the time of the trial.

Bruno argued that if there were insufficient evidence at trial to justify a conviction under the Skilling bribery and kickback theory of honest services fraud, the Court must bar retrial on double jeopardy grounds. The government argued that sufficiency review under a standard different from that at the time of trial was inappropriate and unfair. (The defense did not contend there was insufficient evidence based on the law at the time of trial.) At oral argument, the government stated that the evidence at the new trial would be the same as in the first.

The Court, declining to enact any black letter law, and relying considerably on the government's concession that the evidence would not change at a second trial, agreed to analyze the sufficiency of evidence based on the new, narrower Skilling standard. Nonetheless, after reviewing the facts, the Court held that the evidence was sufficient under that standard. Bruno, therefore, won the battle but lost the war. The government announced that it will reindict him under an honest services fraud theory based on bribery and kickbacks.

Last week, a Southern District of New York jury acquitted William Boyland, Jr., a New York State Assemblyman, of honest services fraud for allegedly receiving bribes from David Rosen, the chief executive of a hospital conglomerate, apparently because of lack of sufficient proof of a quid quo pro. Interestingly, Rosen had two months earlier been convicted in a non-jury trial before Judge Jed S. Rakoff for conspiracy to bribe Boyland based on the same payments at issue. (The cases were not mirror images. Rosen was also charged and convicted of conspiring with two others -- a state senator and another assemblyman.)

Second Circuit - United States v. Bahel - Honest Services - Post-Skilling, courts have struggled with what gets included as bribery and kickbacks and what gets omitted from the new contours of honest services. In Bahel, the defendant was convicted of four counts of mail and wire fraud premised on a deprivation of the United Nations, his former employer, and a 666 violation and conspiracy. Issues of immunity were considered, but the court said that the "United Nations expressly waived Bahel's immunity" and that irrespective he waived the issue. The court held that "Section 1346 is broad enough to encompass honest services fraud committed by a foreign worker at the United Nations."

Bahel also argued "that ‘[n]o reading of [18 U.S.C. § 666] could plausibly be extended to the charges in this case,’ because ‘[t]he United States’ membership in the United Nations is not a "federal program" under [Section] 666(b), and the contributions made to the United Nations under the United States treaty obligation in the U.N. Convention and Charter is not a "benefit" or "form of Federal assistance" under that same sub-section.’ Bahel argues accordingly that Section 666 cannot reach the conduct at issue in this case." The court, however, held that "the United Nations Participation Act, which authorizes the payment of the United States' dues to the United Nations (UN), is both a "federal program" and a "benefit" within the meaning of section 666, which encompasses bribes as well as illegal gratuities."

Here is the Reuters story. Nothing posted yet on PACER. WSJ Law Blog also has coverage. This will be a much tougher case than Rajaratnam was for the government to prove. This morning's WSJ has a decent background piece (subscription required) on the case.

The indictment returned against former United Commercial Bank senior officers Ebrahim Shabudin and Thomas Yu on September 15, 2011, was unsealed on October 11 in the Northern District of California. This is one of the very few significant bank/securities fraud cases, related to the financial meltdown, that has been brought by Attorney General Holder's Department of Justice. Here is a copy of the Ebrahim Shabudin-Thomas Yu Indictment. A virtually identical criminal information was brought against former UCB senior officer Lauren Tran on May 24, 2011. It was not unsealed until October 13, but Tran pled guilty on June 15. The plea agreement is currently unavailable on PACER, despite the Court's order unsealing the record. The essence of the various charges is that senior bank officials systematically deceived the market and bank regulators about the bank's condition, through false entries and statements.

The invaluable William K. Black has written an outstanding article in Credit Writedowns about the pathetic and long-running failure of federal banking regulators to take any meaningful action against UCB. According to Black:

"In 2002, a court found that UCB’s senior managers had engaged in fraud to hide losses on a large loan for the purpose of fraudulently inducing another bank to bear the losses. It found the senior officers’ conduct so outrageous that it awarded substantial punitive damages. The FDIC, the SEC, and the Department of Justice did nothing in response to the fraud."

The bank continued to grow at an alarming rate, continued to receive high regulatory grades, and even obtained hundreds of millions in TARP funds, despite its sordid history and the credible warnings of a concerned whistleblower.

In an otherwise unremarkable bank and mail fraud affirmance, the Fifth Circuit reminds us that losses cannot be included as relevant conduct unless they are bottomed on criminal and/or fraudulent behavior. The appellant in U.S. v. Bernegger (loss must be criminally derived to count as relevant conduct), obtained two grants of $250K each from the State of Mississippi, which secured a first lien on the underlying collateral. Appellant later pledged the same collateral to other entities, but there was literally no evidence indicating that the original grants were procured through fraud. Nevertheless, the probation officer included the grants in the PSR's loss calculation and the trial court accepted the figure. The Fifth Circut also reiterates that "bare assertions" in a PSR are not, standing alone, evidence. This particular error did not affect appellant's Guidelines range, but did result in a reduced restitution award. The panel consisted of Judges Wiener. Clement, and Elrod. Opinion by the Dutchman.

Prosecutors have decided to drop the charges against an individual who had been arrested last year as part of "Operation Copout," a mortgage fraud investigation. The individual had initially been charged with 34 criminal charges, including multiple counts of mail and wire fraud. The case had been tried in a five month jury trial that had ended in a hung jury.

Attorney Michael Pasano, a white collar crime attorney at the law firm of Carlton Fields, who represented the client stated, "The strain on the client and his family was enormous and it is with great relief that we heard today that the Government agreed not to reprosecute and dismissed the case as to Mr. Stoll. It was a hard fought case, and I applaud the prosecutors for doing the right thing,”

It is difficult for prosecutors to be "ministers of justice" with the public outcry for retribution on mortgage fraud cases. It's nice to see that there are prosecutors out there who can do the right thing when the situation warrants it.

I get emails almost every day touting the latest FCPA seminars, webinars, panel discussions, compliance programs, and treatises. Many of these events are no doubt helpful to the white collar practitioner. But what really happens in the trenches for the few brave individuals who take the government to trial in FCPA cases? What do the final FCPA jury instructions look like? The following links are to selected portions of actual instructions given to juries by federal district courts in some recent prominent FCPA cases. Enjoy.

The Lindsey Manufacturing Reply Brief was filed Sunday night by Defendants Lindsey Manufacturing Company, Keith E. Lindsey, and Steve K, Lee. This is a reply to the Government's Opposition to Defendants' Supplemental Brief in Support of Their Motion to Dismiss the Indictment With Prejudice Due to Repeated and Intentional Government Misconduct. The case is in front of U.S. District Judge Howard Matz in the Central District of California.

The Washington Post's Chris Cillizza thinks Solyndra had the worst week in Washington, because its CEO and CFO invoked the Fifth Amendment's Privilege Against Self-Incrimination in front of the House Energy and Commerce Committee. According to Cillizza, the silence of the executives "won't win them any allies in Washington." What allies? These guys already have bruises all over their bodies from where politicians have been touching them with eleven foot poles. Cillizza believes that their taking five "ensures that the probe into how Solyndra won the initial loan in 2009...will not only continue...but grow." This is silly. A vigorous criminal investigation is already assured. If the execs had talked they only would have made the DOJ's job easier.

The first place a bank looks when a big loan goes bad is the borrower's application, including the financial statement. For decades the DOJ has operated as a criminal collection agency for our country's financial institutions. It only gets worse if the loan, in this case about a half billion, is guaranteed by Uncle Sugar. Add in the DC gang mentality attendant upon what has become a political scandal and you would have to be a cretin to open yourself up to possible charges of false statements, perjury, or obstruction of justice. This one was a no-brainer. Kudos to the executives and their attorneys for not being idiots.